Western Pennsylvania Water Co. v. Board of Property Assessment Appeals

and Review, 63 Pa. Cmwlth. 472, 439 A.2d 1259 (1981) 26

Statutes

13 Pa. C.S. § 1-106 38,48

13 Pa. C.S. § 2-610 8

13 Pa. C.S. § 2-712 46

41 Pa. C.S. § 202 45

W. Va. Code § 46-2-306(a) 13

W. Va. Code § 46-2-610 8, 11

W. Va. Code § 46-2-615 33,34,35,38

W. Va. Code § 46-2-712 41

W. Va. Code § 46-2-712(1) 39

W. Va. Code § 46-2-712(2) 39,47

W. Va. Code § 46-2-713(a) 48

W. Va. Code § 46-2-715 ~ 45

W. Va. Code §46-2-615 34

iv

Treatises

2 Hawkland Uniform Commercial Code Series, § 2-610:02 (1998) 8

John Edward Murray, Jr., Murray on Contracts (4th ed. 2001) 38

Lawrence's Anderson on the Uniform Commercial Code 3d 8,35

v

INTRODUCTION

After several years of litigation, culminating in a trial that lasted more than three weeks, three things are clear: (1) the defendants do not like the Coal Sales Agreement; (2) they have no intention of honoring it; and (3) they will use whatever excuse is most convenient to explain away their non-performance and to deprive the plaintiffs of full recovery. Simply put, faced with the economic consequences of an agreement that they willingly, even enthusiastically executed, but later found to be "onerous," the defendants put their economic interests ahead of their contractual obligations. That is their choice, but it is a choice that has and will continue to cause plaintiffs to have to purchase cover coal at significantly higher prices. It is basic contract law, codified in the Uniform Commercial Code ("UCC"), that the defendants must bear those additional costs.

The defendants' reliance on the force majeure clause in an effort to excuse their admitted failure to meet any of the yearly tonnage commitments is simply not supported by the plain language of that clause. The decision to declare force majeure was for "economic factors alone" and none of the cited "causes or conditions" were "beyond [their] reasonable control," "without [their] fault or negligence," and/or "prevent[ed] the mining ... of coal." In fact, all of the conditions that the defendants claim led to their decision to first idle the Sycamore 2 mine and then not fully develop it were either caused by poor mining techniques or by the failure to devote adequate resources to address known or knowable conditions. Such negligent conduct or financially motivated decisions are not force majeure conditions. Similarly, those same excuses do not amount to "commercial impracticability" - a UCC defense that is not available to excuse the defendants' lack of performance in this case.

Likewise, the defendants' arbitrary attempts to cut in half the reserve commitment specified in the Coal Sales Agreement ignores the plain language of the contract as well as the applicable law. According to the defendants, they can simply ignore the "not less than 20 million tons" language as well as the related warranties that they provided for that commitment. Although such an argument, if successful, would result in a significant reduction of damages, it is defeated by the contract as well as an express provision in the UCC that prohibits a party from such drastic reductions in contractual estimates.

Finally, the defendants attempt to rely on the uncertainty caused by their ongoing breaches of the agreement to support an esoteric legal argument that artificially deflates not only the substantial additional costs that plaintiffs have incurred before trial but also additional costs in the future. The defendants inexplicably try to blame the plaintiffs for not immediately going out into the market

and replacing every ton of coal that the defendants agreed to supply - even ignoring the admissions by their damages experts that no such alternative supply was known to be available. The counter is simple - plaintiffs have taken and will continue to take reasonable steps to mitigate their damages. No more is required from the plaintiffs to be entitled to full recovery from the breaching parties.

In short, the defendants, whose actions were motivated solely by financial considerations, want the plaintiffs to bear all of the risks of coal mining; these are risks, however, that the plaintiffs never agreed to assume.

RELEVANT BACKGROUND

On February 17, 2005, Allegheny Energy Supply Company, LLC, and Monongahela Power Company (referred to collectively as either "the plaintiffs" or "Allegheny Energy") entered into an agreement with Anker West Virginia Mining

2

Company, Inc. ("Anker West Virginia"), under which Anker West Virginia agreed to sell

and Allegheny Energy agreed to purchase substantial quantities of coal to be delivered

to Allegheny Energy's Harrison Power Station (the "Coal Sales Agreement"). 1

Coal"), the parent corporation of Anker West Virginia, guaranteed Anker West

Virginia's full and, timely performance of the Coal Sales Agreement.f (ld). Soon after

they entered into the Coal Sales Agreement with Allegheny Energy, the defendants

were acquired by and consolidated into International Coal Group, Inc. ("ICG"). (Trial

Transcript, hereinafter "TI", pp. 915-16).

Under the terms of the Coal Sales Agreement, the defendants agreed to sell and

Allegheny Energy agreed to purchase all of the coal produced from the Sycamore 2

mine, which was estimated in the Coal Sales Agreement to be not less than 20 million

tons. For 2005, the Coal Sales Agreement provides that the defendants would deliver

the actual production from the Sycamore 2 mine, which was estimated to be 500,000

tons.f (Plfs' Ex. 21). For 2006, the defendants agreed to deliver the actual production

from the Sycamore 2 mine, estimated to be 1.2 million tons, but they committed to a

production rate of 150,000 tons per month beginning on October 1, 2006. (ld).

Finally, for the period from January 1, 2007 through the expiration of the Coal Sales

1 Anker West Virginia Mining Company, Inc. is now known as Wolf Run Mining Company.

2 Anker Coal Group, Inc. is now known as Hunter Ridge Holdings, Inc.

3 The initial production was estimated in the Coal Sales Agreement because the Sycamore 2 mine was a new mine and there was uncertainty about the rate at which the mine would be initially developed. (TI, p. 182).

3

Agreement, the defendants were obligated to deliver coal to Allegheny Energy at a rate of 1.8 million tons per year until the Sycamore 2 reserve was exhausted. (Id).

The defendants have never come close to delivering the quantities of coal that they promised to deliver. (TT, pp. 182-84). Instead, the defendants have offered numerous excuses for their non-performance. However, after sixteen days of trial, during which this Court heard testimony from 25 witnesses and admitted hundreds of exhibits into evidence, several points are clear.

First, there is absolutely no dispute that the defendants have failed to deliver the quantities of coal that they promised to deliver in accordance with the schedule contained in § 1.2 of the Coal Sales Agreement. In fact, since October 1, 2006, the defendants have delivered only about 16% of their total commitment. The defendants' repeated failures to deliver coal in accordance with the requirements of the Coal Sales Agreement are material breaches of that agreement. Further, assuming that their evidence on the reduced size of the reserve is credible, the defendants have breached the Coal Sales Agreement by failing to possess sufficient reserves to enable them to deliver approximately 20 million tons of coal, the quantity estimated in the Coal Sales Agreement.

Second, the defendants' claims of force majeure and commercial impracticability are not supported by the Coal Sales Agreement, the applicable law or the facts of record. The force majeure defense fails because the evidence of record clearly establishes that: (I) the defendants' force majeure claim was improperly motivated solely by financial considerations; (2) the defendants either knew of the conditions that form the basis for their force majeure claim before they entered into the Coal Sales Agreement and they did not take reasonable steps to address or abate

4

them or they actually caused the conditions; and (3) the defendants failed to give

The defendants' commercial impracticability defense fails because the force

majeure provision of the Coal Sales Agreement is a comprehensive description of the

circumstances that would excuse performance; therefore, as a matter of law, the

defense of commercial impracticability is not available. Even if this was not the case,

the commercial impracticability defense is not supported by the evidence. Indeed, the

evidence of record demonstrates that the defendants knew of every condition that

could conceivably form the basis for their commercial impracticability defense before

they entered into the Coal Sales Agreement. Moreover, they have failed to introduce

evidence to prove the serious financial burden that is an element of this defense.

Finally, the evidence is clear that, as a result of the defendants' breaches of

various provisions of the Coal Sales Agreement, Allegheny Energy has incurred

substantial damages that will continue into the future. As of the date of trial,

Allegheny Energy had spent approximately $85 million to purchase cover for the coal

that the defendants failed to deliver. Depending upon the reserve commitment

determined by this Court, Allegheny Energy will spend between approximately $90

and $342 million to cover the defendants' future delivery shortfalls.

DISCUSSION

I. The Defendants Have Breached the Coal Sales Agreement and Related Guarantee

A. The Defendants Have Materially Breached the Coal Sales Agreement by Failing to Deliver the Agreed-Upon Annual Tonnage

The defendants do not, and cannot, dispute that they have failed to deliver the

quantities of coal that they promised to deliver in the Coal Sales Agreement. Even

during the time period when the defendants' delivery obligations were merely

5

estimated, their actual deliveries fall well short of the quantities estimated in not only the Coal Sales Agreement but also in subsequent production estimates that they provided to the plaintiffs.

As previously noted, for 2005, the Coal Sales Agreement estimated that coal deliveries would be 500,000 tons. (Plfs' Ex. 21). In June of 2005, the defendants advised Allegheny Energy that their deliveries for 2005 would be approximately 210,000, less than half of the estimate contained in the Coal Sales Agreement. (Plfs' Ex. 40). The actual deliveries during 2005 were only about 45,000 tons, less than 10% of the estimate contained in the Coal Sales Agreement and about one-fifth of the estimate provided by the defendants in June of 2005. (TT, p. 182).

Upon receipt of the defendants' June 2005 forecast, Allegheny Energy became concerned about expected production for 2006. (TT, pp. 198-99; Plfs' Ex. 40). In response to Allegheny Energy's concerns, the defendants assured Allegheny Energy, both in writing and at a meeting in July or August of 2005, that they would provide 1.2 million tons in 2006. (Plfs' Ex. 40; TT, pp. 201-03). However, at the same time the defendants, in their internal communications, were expressing doubts about their ability to perform. (Plfs' Ex. 31). These doubts were not shared with Allegheny Energy. (TT, p. 2702). Despite repeated assurances by the defendants that they would produce 1.2 million tons in 2006, they actually produced only a "very small" amount. (TT, p. 183). Indeed, for the period October through December, 2006, a time during which the Coal Sales Agreement imposed a defmite obligation on the defendants to deliver 150,000 tons per month, the defendants delivered no coal whatsoever. (Plfs' Ex. 606).

For 2007, the defendants promised to deliver 1.8 million tons of coal. Their actual deliveries were only 21,646 tons. (Plfs' Ex. 606). In 2008, the defendants

6

delivered only 298,721 of their 1.8 million ton obligation. (Jd). For 2009, the

defendants' delivery obligation was 1,351,260 tons; of which they delivered only

357,999 tons." (Jd). Finally, for 2010, the defendants delivered only 523,266 of their

1.8 million ton obligation. (Jd). In sum, since October 1, 2006, when the Coal Sales

Agreement first imposed specific delivery obligations on the defendants, the total

tonnage that should have been delivered in accordance with the schedule established

by § 1.2 of the Coal Sales Agreement was 7,201,260 tons. The defendants actually

delivered only 1,201,632 tons. (Plfs' Ex. 606). This failure to perform is clearly a

material breach of the Coal Sales Agreement.

B. The Defendants Have Repudiated Their Obligations Under the Coal Sales Agreement

The defendants argue that Allegheny Energy cannot assert a claim for future

breach of contract, but rather can only recover future damages based on the

defendants' anticipatory repudiation of the Coal Sales Agreement. Although there is

more than one viable theory for the recovery of future damages in this case, Allegheny

Energy agrees that it can recover its future damages based on the defendants'

anticipatory repudiation. Under an anticipatory repudiation theory, the primary issue

for this Court to resolve is the date of the anticipatory breach. The market price of

coal as of that date becomes the yardstick by which the plaintiffs' future damages are

measured. There are two related issues that need to be addressed in connection with

this analysis: (1) the date that the defendants unequivocally refused to perform; and

4 The defendants' delivery obligation for 2009 was reduced because Allegheny Energy exercised its right under § 6.2 of the Coal Sales Agreement to suspend deliveries for approximately three months to manage the coal inventory at the Harrison Station. (TT, pp. 220-22).

7

(2) Allegheny Energy's right, as a non-breaching party, to elect not to treat a failure of performance as an anticipatory breach but instead await performance for a commercially reasonable time. For reasons discussed below, the date of trial is the appropriate date of the defendants' anticipatory repudiation.

Official comment 1 to § 2-610 of the UCC defines an "anticipatory repudiation" as an "overt communication of intention or an action which renders performance impossible or demonstrates a clear determination not to continue with performance." 13 Pa. C.S. § 2-610, cmt. 1; W. Va. Code § 46-2-610, cmt. 1. More specifically, an anticipatory repudiation occurs where there is a "clear manifestation communicated in advance of the time for performance that the required performance will not be rendered or tendered at the required time." Lawrence's Anderson on the Uniform Commercial Code 3d ("Anderson") § 2-610: 11. "An anticipatory repudiation must be a definite and unequivocal refusal to perform the contract." Id.

In Mextel, Inc. v. Air-Shields, Inc., No. 01-cv-73081, 56 U.C.C. Rep. Servo 2d (Callaghan) 1,2005 U.S. Dist. LEXIS 1281 (E.D. Pa. January 31,2005), the court held that a letter sent by the defendant did not meet the "defmite and unequivocal" standard. Id. at *15 n.13. The letter stated: "pursuant to an earlier telephone conversation between the parties, 'all sensors and controllers are on 'Production Hold' with the exception of spares, which will be handled on an as-needed basis.' "Id. In finding that the letter did not constitute an anticipatory repudiation, the court noted that the letter did not indicate that the defendant was no longer willing to perform under the parties' agreement. Id. Thus, the court held that the "letter did not manifest a definite and unequivocal refusal to perform an obligation not yet due." Id. See also, 2 Hawkland Uniform Commercial Code Series, § 2-610:02 (1998) ("parties can go very far, indeed, by way of threatening conduct without anticipatorily

8

repudiating the contract, but they 'cross the line' once they move from mere threats to definite and unequivocal refusal to perform."); China v. Compass Communications, 473 F. Supp. 1306, 1309 (D.D.C. 1979) (holding an anticipatory repudiation of a contract occurs when one party, by words or actions, communicates a positive and unequivocal intention not to perform its obligations under a contract).

The defendants here did not commit to a position on their future performance before trial. What is most significant about the defendants' pretrial statements is that none of them contain an unequivocal declaration of the actual yearly tonnage that the plaintiffs would receive for the life of the contract - a bare minimum to enable the plaintiffs to make purchasing decisions. In fact, the first time that the defendants made anything close to a conclusive statement to the plaintiffs regarding their intention never to commit the resources needed to bring the mine to full production, and thus, fulfill their obligations under the Coal Sales Agreement, was during the testimony of their witnesses at trial. Bennett Hatfield, the President of ICG, the parent corporation of both defendants, testified that it was very unlikely that the third or fourth mining section necessary to achieve 1.8 million tons per year would ever be added. (TT, p. 981). Gary Hartsog, the defendants' expert mining engineer, testified that the production of 1.8 million tons per year from the Sycamore 2 mine was "not plausible." (TT, pp. 1774-78). Chuck Dunbar, the Director of Mine Development for ICG, testified that the addition of a third or fourth mining section was not a "realistic possibility." (TT, p. 1199). These statements demonstrate that the defendants have repudiated their obligations under the Coal Sales Agreement at trial. There is no evidence of record that any of these statements were made to Allegheny Energy at any time before the trial.

9

Instead, in an attempt to deflate artificially the plaintiffs' damages, the defendants contend that they repudiated the Coal Sales Agreement before December of 2006. ('IT, p. 896). However, they cannot identify any communication in or before the December, 2006 timeframe that constitutes a clear and unequivocal statement to Allegheny Energy that the defendants would never perform their obligations under the Coal Sales Agreement. Rather, they rely on ambiguous statements to the plaintiffs about their future intentions, as well as comments made during a conference call with investment analysts (to which the plaintiffs were not a party), to argue that a repudiation occurred in 2006. The defendants appear to want to wind back the hands of time and transform these intentionally vague comments into something that they are not. However, the evidence of record does not support their efforts.

The defendants cite the force majeure letter and related communications that occurred in and around August of 2006 as evidence that the repudiation occurred at that time. However, Mr. Hatfield acknowledged that the force majeure letter, which advised that the mine would operate as a single section "for the foreseeable future," was ambiguous as to how long production from the Sycamore 2 mine would be limited. ('IT, pp. 1040-41). Indeed, Mr. Hatfield testified that in August of 2006 nobody knew how long the Sycamore 2 mine would have to operate as a single section

mine.

(Id). Mr. Hatfield also admitted that he could not identify a single

communication to the plaintiffs informing them that the defendants would never honor their obligations under the Coal Sales Agreement. (Id, p. 1042). The defendants had the opportunity to provide clear and unequivocal information to Allegheny Energy that would be not only a legitimate basis to find an anticipatory repudiation but also would have provided the plaintiffs with the information needed to

10

make purchasing decisions into the future. They chose not to avail themselves of that opportunity.

Unable to identify even one written communication to the plaintiffs that they would never perform in accordance with the requirements of the Coal Sales Agreement, the defendants attempt to rely on a statement made by Mr. Hatfield during a conference call with investment analysts. (TT, pp. 964-65). During that conference call, Mr. Hatfield did state that production from the Sycamore 2 mine would be

"permanently downsized."

(Plfs' Ex. 59).

However, even assuming that this

information (which, significantly, says nothing about the actual yearly production that would be expected) is adequate, there is no evidence that this same information was ever communicated to the plaintiffs. Neither of the plaintiffs was a party to that teleconference and there is no evidence of record that the plaintiffs were invited to participate in the call. (TT, pp. 1090-91). Moreover, the defendants cannot reasonably claim that the plaintiffs should have learned that the defendants would never fulfill their obligations under the Coal Sales Agreement during a conference call between officers of the defendants' corporate parent and investment analysts. Because there is no evidence of a clear and unequivocal statement by the defendants to the plaintiffs in 2006 that they would never deliver the quantities of coal that they promised to deliver in the Coal Sales Agreement, there was no repudiation at that time.

However, even if the defendants are correct and they did repudiate the Coal Sales Agreement in 2006, Allegheny Energy was not obligated to treat that repudiation as a breach of the defendants' future obligations under the Coal Sales Agreement. Rather, pursuant to § 2-610 of the UCC, Allegheny Energy had the option of waiting a commercially reasonable time for the defendants to perform their contractual obligations. W. Va. Code § 46-2-610(1). Considering the length of this contract and

11

the lack of definitive information being provided by the defendants, this right cannot

be ignored in this case. Moreover, despite the defendants' arguments to the contrary,

it is clear from their course of conduct that both parties recognized this right during

the period before trial. Specifically, the defendants continued to deliver coal to

Allegheny Energy, albeit at levels substantially lower than what they promised in Coal

Sales Agreement, and Allegheny Energy continued to accept and pay the contract

prices for the coal that the defendants delivered.

Thus, this continued partial performance under the Coal Sales Agreement

demonstrates that neither party treated the defendants' conduct in 2006 as

discharging their obligations under the Coal Sales Agreement. However, at trial the

defendants' witnesses clearly testified that the defendants have no intention of meeting

their future tonnage obligations. Moreover, treating the defendants' declarations as an

anticipatory repudiation provides certainty as to the appropriate date for the measure

of market price under this theory and otherwise comports with the UCC. Hence, the

time of trial of this case is the appropriate time from which the effects of the

defendants' anticipatory repudiation should be analyzed.

C. The Defendants Have Breached Sections 1.2 and 10 of the Coal Sales Agreement

Section 1.2 of the Coal Sales Agreement requires that the defendants deliver 1.8

million tons per year and that they deliver all the coal produced by the Sycamore 2

mine, which at the time the Coal Sales Agreement was executed was estimated to be

"not less than 20,000,000 tons." (Plfs' Ex. 21). Further, the defendants were

precluded by § 1.2 from reducing the assigned reserves below that reflected in

Schedule 1.2, without Allegheny Energy's consent. In addition to the defendants'

failure to meet their annual contractual obligations, it now appears that the

defendants will never deliver the estimate of not less than 20 million tons of coal.

12

When the quantity to be delivered under a contract is measured by output, as it

is in this case, "no quantity unreasonably disproportionate to any stated estimate may

be tendered or demanded." W. Va. Code § 46-2-306(a). The evidence introduced by

the defendants at trial confirms that they do not intend to deliver to Allegheny Energy

anywhere close to approximately 20 million tons of coal. The defendants' expert

geologist, Alan Stagg, estimated that the total mineable tonnage remaining in the

double the estimated amount of fuel oil held unreasonably disproportionate). The

defendants' unreasonably disproportionate estimate of what they may ultimately

deliver under the Coal Sales Agreement is a breach of § 1.2 of the Coal Sales

Agreement.

S When the 1.2 million tons of coal already mined from the Sycamore 2 mine is added to the defendants' estimates of remaining reserves, Mr. Stagg's total reserve estimate is 12.4 million tons and Mr. Coolen's estimate is 10.8 million tons.

13

Furthermore, in § 10 of the Coal Sales Agreement, the defendants represented

and warranted, among other things, that they had sufficient reserves to deliver "the

breaches of §§ 1.2 and 10 are not excused by the force majeure provision of the Coal

Sales Agreement. The defendants have offered no other legal excuse for their failure

to deliver an amount reasonably proportionate to the "not less than 20 million tons"

estimated in the Coal Sales Agreement. Accordingly, the defendants' breach of §§ 1.2

and 10 is an unexcused breach of the Coal Sales Agreement.

D. The Defendants Have Breached Section 1.3 of the Coal Sales Agreement

Before entering into the Coal Sales Agreement, Allegheny Energy had a separate

agreement with the defendants for delivery of coal from the Sycamore 1 mine. (Plfs'

Ex. 4). The defendants closed the Sycamore 1 mine before all of the required tonnage

6 Contrary to defendants' assertions during trial, Judge Wettick found only that § 10 of the Coal Sales Agreement does not require defendants to supply coal from reserves other than Sycamore 2. Memorandum and Order of Court dated May 11,2010, pp. 5- 6. He did not hold that the language of § 10 has any impact upon defendants' promise to deliver an estimated 20 million tons from the Sycamore 2 reserve.

14

was delivered. (TI, p. 185). To account for the shortfall in deliveries from the

Sycamore 1 mine, the parties included § 1.3 in the Coal Sales Agreement, which

provided for the delivery of the shortfall from the Sycamore 1 to be made from the

Sycamore 2 mine at the prices established for deliveries from the Sycamore 1 mine.

(PIfs' Ex. 21; TI, p. 186).

The Sycamore 1 mine was eventually closed in March of 2007 and there was

In this case, the Coal Sales Agreement defines a force majeure condition as:

Any causes or circumstances beyond the reasonable control and without fault or negligence of the party affected thereby or its subcontractors or carriers, such as, acts of God, governmental regulation, war, acts of terrorism, weather, floods, fires, accidents, strikes, major breakdowns of equipment, shortages of carrier's equipment, accidents of navigation, interruptions to transportation, embargoes, orders of civil or military authority, or other causes, whether of the same or different nature, existing or future, foreseen or unforeseeable, which wholly or partly prevent the mining, processing, shipment and/ or loading of the coal by the Seller, or the receiving, transporting and / or delivery of the coal by any carrier, or the accepting, utilizing and/ or uploading of the coal by Buyer, but specifically excluding economic factors alone.

(Plfs' Ex. 21).

Thus, in order to excuse their performance, the defendants must have proven that

causes or circumstances claimed to constitute force majeure conditions are not based

upon economic factors alone and that: (1) they were beyond the defendants'

reasonable control; (2) they occurred without the defendants' fault or negligence; and

(3) they wholly or partly prevent mining. The defendants' proof failed on all counts.

The defendants first notified Allegheny Energy that they had allegedly

of the shortfall was attributable to operations at the Sycamore 2 mine. (Jd). In

discussing certain regulatory requirements, Mr. Hatfield wrote in his email, "if this

policy holds, most of the Sycamore II (sic) mine reserve will essentially be non-

economic." (Jd). Mr. Hatfield concluded his discussion of the Sycamore 2 mine by

stating that consideration was being given to closing the Sycamore 2 mine

permanently as a result of the financial performance issues coupled with the breach of

a gas well during mining operations. (Jd).

7 Mr. Hatfield testified that the only issue currently preventing the defendants from producing the agreed upon quantities of coal was the presence of gas wells on the Sycamore 2 reserve. (TI, pp. 1064-65).

17

Later that same day, Wendy Teramoto replied to Mr. Hatfield's e-mail by

inquiring as to whether ICG could close the Sycamore 2 mine and claim that it was a

force majeure. (Jd). At the time, Ms. Teramoto was an employee of W.L. Ross & Co.,

as well as a member of ICG's Board of Directors. (TT, p. 1007).

Mr. Hatfield

responded to Ms. Teramoto, stating:

I am pretty sure it would, since the contract term is specific to the life of that particular reserve. All that Allegheny could claim is that we didn't try hard enough to mine their coal, but having bought all new equipment and enduring plus a $60jton mining cost, I wouldn't expect that allegation to hold up well.

(Plfs' Ex. 521).

Mr. Hatfield acknowledged during his trial testimony that his answer to Ms.

Teramoto's question was that the defendants could declare force majeure based on the

cost of mining. (TT, p. 1037). Two weeks after this e-mail exchange, the defendants

notified Allegheny Energy that they were invoking the force majeure provisions of the

are not going to go back into the mine unless we can justify the cost of rehab against

future production." (Jd).

Then, on November 1, 2006, Mr. Hatfield sent an e-mail to ICG budgeting

personnel. (Plfs' Ex. 66). In that e-mailv Mr. Hatfield wrote:

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Why would we restart Sycamore 2 Mine if it is expected to lose $8.46 cash per ton despite our injection of new equipment and improved mine plan? The answer is we would not. The mine forecast needs to be either break even performance or continued idle.

As these e-rnails demonstrate, the defendants' force majeure declaration was

motivated solely by financial considerations. However, the Coal Sales Agreement

employed by Wolf Run Mining, who reported to Ryan Desko and who was the principal

contact with Alpha regarding the well searches, that Alpha had identified several

hundred well sites on or near the Sycamore 2 reserve that would have to be located.

(Plfs' Ex. 533; IT, pp. 1685, 1802-03).

In January of 2005, Mr. Hartsog sent a memo to Mr. Beauchamp, again

addressing the gas well issue on the Sycamore 2 reserve. In his January 2005 memo,

Mr. Hartsog advised Mr. Beauchamp that he had reviewed the state maps for gas wells

located within the first six months of mining. Mr. Hartsog informed Mr. Beauchamp

that "many of the older wells cannot be located easily due to lack of documentation,

subsequent construction or mining and the reclamation of nature." (Plfs' Ex. 18). Mr.

23

Hartsog's memo also advised Mr. Beauchamp that some wells "are of questionable location and may require significant effort to locate." (Jd). Mr. Hartsog's memo stated that locating some of the gas wells on the Sycamore 2 reserve would "require time and

. effort to follow as much of the paper train as possible before going to the field. There will also need to be some time with heavy equipment in some areas trying to locate old well bores." (Jd). Mr. Hartsog concluded his memo by stating that "[N]o one can guarantee that all the wells shown in the various data bases exist or can be found. We estimate there will be several or many that cannot be confirmed or found." (Jd). All of this information was provided to defendants before the contract was signed, but none of it was shared with Allegheny Energy. (TT, pp. 2702-03).

Despite the fact that they called Mr. Hartsog as their witness, the defendants initially attempted to argue that there was no evidence that Mr. Hartsog's memo had been received or reviewed by anyone at Wolf Run Mining. However, Mr. Hartsog testified that he had the memo delivered to Mr. Beauchamp, that he had discussed the contents of the memo with Mr. Beauchamp before it was sent, (TT, pp. 1684-86, 1802- 04), and that Mr. Beauchamp later chastised him for performing the work necessary to prepare the memo without authorization. (TT, pp. 1853-54). In light of such evidence, it cannot be seriously disputed that Mr. Beauchamp did, in fact, receive and review Mr. Hartsog's memo.

Having been thwarted by their own witness in their efforts to rewrite history, the defendants then changed tactics and argued that no one in the defendants' management ever received the memo or knew about the potential problems with the gas wells on the Sycamore 2 reserve. Again, however, this argument is belied by defendants' own witness, Mr. Hartsog, whose testimony and June 8, 2005, e-mail

24

confirms that defendants' management was indeed aware of the problem. In his June

8, 2005, e-mail to Chuck Dunbarr Mr. Hartsog states that he had

... been after Ryan [Desko, the Manager of Engineering] since we started talking about Sycamore 2 last August/September [2004] to let us get a handle on what wells can be found, what cannot, and then go sit with the state folks in Charleston to see what. can be done without stripping the top soil from half of Harrison County.

(Plfs' Ex. 35; 11, pp. 1684-86, 1802-04).

In short, the defendants' Manager of Engineering knew at least as early as

August or September of 2004 that they needed to address this significant problem.

Moreover, Mr. Beauchamp, who was Mr. Hartsog's principal contact, was also aware of

a large number of gas wells on the reserve and the significant difficulties that would be

encountered in locating them. (11, pp. 1804-06).

Even if this information was not shared with anyone else at that time, the

1974).8 This case was an action for violation of the Interstate Commerce Act, 49

U.S.C. § 322(a). The prosecution alleged that the defendant violated the act by

requiring or permitting two drivers to operate a motor vehicle when the defendants

knew that the drivers' ability to do so was impaired because of illness. Id. at 732.

There was no dispute that the two drivers were ill and had informed their dispatcher of

this fact. Id. at 733-36. Thus, the issue was whether the dispatcher's knowledge of

8 The Coal Sales Agreement provides that the rights and obligations of the parties "shall be governed by the laws of the State of West Virginia." (Plfs' Ex. 21). West Virginia courts often look to Virginia law as instructive when their own courts have failed to address an issue. See Helmick v. Potomac Edison Co., 185 W. Va. 269, '276, 406 S.E.2d 700,707 (1991).

25

the drivers' illnesses was also knowledge of the corporation. Id. at 738. In concluding

that the corporation had knowledge of the facts known to its dispatcher, the district

court held:

A corporation can only act through its employees and, consequently, the acts of its employees, within the scope of their employment, constitute the acts of the corporation. Likewise, knowledge acquired by employees within the scope of their employment is imputed to the corporation. In consequence, a corporation cannot plead innocence by asserting that the information obtained by several employees was not acquired by anyone individual employee who then would have comprehended its full import. Rather, the corporation is considered to have acquired the collective knowledge of its employees and is held responsible for their failure to act accordingly.

the information in their possession regarding the gas wells, either before they entered

into the Coal Sales Agreement or before they opened the Sycamore 2 mine.

As previously noted, the defendants knew as early as August or September of

2004 that there was an abundance of abandoned wells on the Sycamore 2 reserve that

could cause problems and that they had to be addressed promptly. (Plfs' Ex. 35). In

January of 2005, Mr. Hartsog advised the defendants that many of the abandoned

wells would be difficult to locate and that some work with heavy equipment would be

necessary to satisfy the regulators that a diligent search had been performed. (Plfs'

Ex. 18).

27

Despite their knowledge of a large number of abandoned wells and their acknowledgement that wells must be accounted for before a mine opens, the defendants did not begin looking for gas wells on the Sycamore 2 reserve until late April of 2005. (11, p. 1819). Furthermore, despite Mr. Hartsog's advice that some work with heavy equipment would be necessary, the defendants never authorized Alpha to rent and use heavy equipment to locate gas wells. (11, p. 1828). Indeed, Mr. Hartsog testified that even if Alpha had been authorized to do so, it would not have been willing to engage in surface excavation to locate wells and he so informed the defendants. (11, p. 1770-71, 1850).

Because Alpha was not experienced in locating these types of abandoned gas wells and was not willing to do the necessary surface excavation, the defendants knew that they had to engage someone else to conduct the well search. However, it was not until September of 2006, after the defendants had intersected an abandoned gas well and temporarily suspended operations at the Sycamore 2 mine, that they began "contemplating" a more intensive search for wells of the type that had been recommended by Mr. Hartsog in January of 2005. (11, p. 1275). Moreover, the defendants did not engage Top Dog Well Excavation ("Top Dog") to begin looking for abandoned wells until October of 2006. (11, pp. 1174-75). Once the defendants engaged Top Dog and actually began doing what they should have been doing all along, they were successful in locating abandoned gas wells on the Sycamore 2 reserve. (11, p. 956). At the same time, however, even after they engaged more experienced personnel to search for wells, there were significant delays in the searches, including a time period of more than a year, between April of 2009 and June of2010, during which no searches were conducted. (11, pp. 2004).

28

Although it is true that the existence of abandoned gas wells on the Sycamore 2

reserve is not something that the defendants could control, efforts to ascertain

expeditiously the number and impact of the wells, as well the timing and methods

used to search for wells, were squarely within their control. ('IT, p. 2613). The

defendants' "efforts" to locate gas wells that they knew existed on the Sycamore 2

reserve months before the Coal Sales Agreement was executed were neither prudent

nor reasonable; indeed, they were woefully inadequate. ('IT, pp. 2609-10). That point

is made abundantly clear by the actions that defendants began to take once they

intersected the well compared to their actions prior to that time.

c. The Defendants' Fault and/or Negligence in Failing to Adequately Address the Gas Well Situation Bars Them From Invoking the Force Majeure Provision

"Negligence requires a foreseeable risk of danger or injury and conduct

Moreover, despite some of the self-serving statements of Mr. Hartsog made after

a well for which he had searched unsuccessfully - without using the methods he

advocated - had been breached, there is no evidence of any purported change in the

9 While at various times the defendants attempted to assert that the regulations themselves related to mining in the vicinity of gas wells changed, they now admit that no such change has occurred since at least 2001. ('IT, pp. 1274, 1793).

30

regulations after the execution ·of the Coal Sales Agreement in any other document,

including those issued by MSHA, the agency that allegedly changed its enforcement.

Indeed, MSHA indicates in the citation it issued to defendants just after the breach

of their efforts. (Plfs' Ex. 516). According to MSHA's citation, these statements were

made at the same meeting in which Mr. Hartsog asserts his contradictory claim that a

change of enforcement was revealed. In point of fact, as discussed above, Mr. Hartsog

had warned the defendants in January of 2005, before the contract was signed, that

MSHA required documentation of searches for abandoned and difficult to find wells,

and that the regulatory climate was changing. (Plfs' Ex. 18).

The changing regulatory climate was known to the defendants in January of

2005, and thus the defendants' response to any such change was within their control.

Their failure to react and modify their search methods represents negligence and fault

on their part, thus precluding any claim of force majeure.

Finally, the defendants have failed to offer any evidence that any alleged

change in regulations or enforcement actually prevented them from mining. In the

absence of such evidence, the defendants have failed to meet their burden of proving

that the change in the enforcement of regulations is a force majeure event or

condition. See Gulf Oil, supra, 706 F.2d at 455.

5. The Defendants Failed to Provide Prompt Notice of and Full Information Concerning the Alleged Force Majeure Conditions

Section 13.2 of the Coal Sales Agreement requires that any party claiming the

existence of a force majeure condition provide to the counter-party prompt notice and

full particulars concerning the conditions claimed to constitute a force majeure. (Plfs'

Ex. 21). The defendants did neither.

31

As previously discussed at length, the defendants knew of potential problems relating to abandoned wells as early as August of 2004. (Plfs' Ex. 35). The defendants also knew, no later than January of 2005, that there was a large number of wells, that many of the gas wells on the Sycamore 2 reserve would be difficult to locate and that some of them may never be located. (Plfs' Ex. 18). However, the defendants did not notify Allegheny Energy of any issues relating to abandoned gas wells until after they intersected a gas well during mining in June of 2006. (TT, p. 364). Even then, the defendants never notified Allegheny Energy that their production would be limited in any way because of the abandoned gas wells. (Jd). In fact, the first notice that production from the Sycamore 2 mine would be limited was not provided until August of 2006, approximately two years after the defendants first learned of the potential issues. (TT, p. 365). Instead of providing any notice to plaintiffs during this period, defendants were instead providing repeated assurances that they would meet the tonnage commitments in the contract. Thus, a two year delay in providing notice is not prompt notice under any circumstances. Therefore, the defendants' force majeure claim is barred.

Even if the defendants' notice had been timely, their force majeure defense fails because they failed to provide full particulars relating to the conditions claimed to constitute a force majeure. After finally receiving notice from the defendants of their claim that production would be limited because of abandoned gas wells, Allegheny Energy sent two requests for information to the defendants. (Plfs' Ex. 58; Plfs' Ex. 67). Despite having a contractual obligation to do so, the defendants refused to provide much of the information that was requested in Allegheny Energy's second request for information. (Plfs' Ex. 69). Significantly, despite claiming that abandoned gas wells on the Sycamore 2 reserve constituted a force majeure condition, the defendants

32

pointedly refused to provide information relating to abandoned wells in their response

to Allegheny Energy's second information request. (Id; TT, pp. 374-76). Because the

defendants failed to provide full particulars relating to their force majeure defense

relating to gas wells, they may not rely upon the force majeure provisions in the Coal

615 of the UCC which states, in pertinent part, that: "This section excuses a seller

from timely delivery of goods contracted for, where his performance has become

commercially impracticable because of unforeseen supervening circumstances not

34

within the contemplation of the parties at the time of contracting." W. Va. Code § 46- 2-615, cmt 1. See also, Anderson, § 2-615:38 ("In order for performance to be excused, the contingency must be unforeseen and unusual, and must be distinct from the risks and hazards of a foreseeable character.").

"Whether a contingency was reasonably foreseeable is determined objectively at the time the contract was made. It does not matter what the seller subjectively believed or expected." Anderson, § 2-615:40. Moreover, "[a] seller's supply difficulties do not excuse the seller's performance by virtue of VCC § 2-615 where supply difficulties were or should have been within the contemplation of the seller and no reallocation for this potential problem was made by the contract." Id., § 2-615:67.

In this case, the defendants have never specifically identified what circumstances created "commercial impracticability." They have, however, identified a number of conditions that could be part of their claim of commercial impracticability. Those conditions include the auger holes near the mine entrance, the condition of the road leading to the mine, the thinner than anticipated coal seam, fluctuations in the coal seam and, of course, gas wells. The evidence of record establishes, however, that each of these conditions was not only reasonably foreseeable but, in virtually all cases, actually known or foreseen before the parties entered into the Coal Sales Agreement. Indeed, Mr. Dunbar testified that each of the alleged "supervening events" are common issues that arise when mining in the Pittsburgh coal seam.

Mr. Dunbar testified that "auger holes are a known issue that could come up in any mine." (TT, p. 1204). Moreover, the evidence in this case establishes that not only was the presence of auger holes foreseeable, but they were actually foreseen by the defendants' senior management. On November 2, 2004, more than three months before the Coal Sales Agreement was signed, D. Lynn Shanks, who at the time was the

35

president of Anker West Virginia [Wolf Run Mining], sent an email to Michael Delmar of Allegheny Energy in which Mr. Shanks provided initial production estimates. (Plfs' Ex. 6). In that e-mailv Mr. Shanks stated that the defendants had not yet determined whether "auger holes were present or not." (Jd). Thus, the evidence of record shows that the defendants foresaw the possible presence of auger holes before the Coal Sales Agreement was executed. Therefore, auger holes cannot be a basis for the defendants' commercial impracticability defense.

During trial, the defendants also introduced evidence relating to the condition of the road leading to the Sycamore 2 mine and the need to upgrade that road to accommodate the tonnage called for in the Coal Sales Agreement. (TI, pp. 1876-78). Mr. Dunbar testified that the condition of the road that currently leads to the Sycamore 2 mine is the same as what existed before the Coal Sales Agreement was executed. (TI, p. 1230). Other evidence shows that the defendants knew before they entered into the Coal Sales Agreement that in order to deliver the quantities of coal that they promised, they would have to upgrade the road. Specifically, on November 22, 2004, again about three months before the Coal Sales Agreement was executed, Mr. Shanks sent another e-mail to Mr. Delmar in which he wrote "to operate at the increased tonnage levels, I feel certain that road improvements will be required." (Plfs' Ex. 11). Thus, road issues were known before the contract was executed and cannot be a basis for a defense of commercial impracticability.

The defendants have also argued that the coal seam was thinner than anticipated and that fluctuations in the coal seam presented issues with mining the Sycamore 2 mine. Those fluctuations are foreseeable when mining in the Pittsburgh coal seam. When Mr. Dunbar was asked if the Sycamore 2 mine was the first mine where he ever experienced rolls in the coal seam, his response was "no, not at all."

Indeed, David Maynard, who previously operated the Sycamore 1 mine as part of a joint venture with the defendants, testified that he hit some areas of thin coal seam in that mine. (IT, p. 1338). Mr. Breckenridge, Allegheny Energy's mining engineer, testified that during his visit to the Sycamore 1 mine, he observed variability in the coal seam. (IT, pp. 507-08). Before beginning operations at the Sycamore 2 mine, the defendants knew that the coal seam in the Sycamore 2 mine was virtually identical to the coal seam in the Sycamore 1 mine. (IT, p. 1209). Thus, the fluctuating coal seam, and the thinner than anticipated seam in some portions of the mine was clearly foreseeable. For that reason, it cannot be a basis for a commercial impracticability defense.

Finally, as previously demonstrated, the defendants knew of the presence of an abundance of abandoned gas wells on the Sycamore 2 reserve as early as August or September of 2004, more than 4 months before entering into the Coal Sales Agreement. (Plfs' Ex. 35). The defendants also knew, by January of 2005 at the latest, that many of the wells would be difficult to locate and, in fact, some may never be located. (Plfs' Ex. 18). Accordingly, the presence of gas wells and the substantial efforts that would be required to locate them cannot be a basis for the defendants' commercial impracticability defense.

In short, every circumstance that could conceivably form a basis for the defendants' commercial impracticability defense was known to or foreseen by the defendants before they entered into the Coal Sales Agreement. Therefore, the defendants' commercial impracticability defense must fail.

37

Finally, even if the defendants had proven - which they failed to do - that the

plethora of conditions that they raised at trial were unforeseen, they failed to

demonstrate that any of these conditions rendered their performance commercially

impracticable. While they introduced some evidence regarding increased costs of

operating the mine at its current level of production, there was absolutely no evidence

of the economic impact, let alone impracticability, of complying with their obligations

under the Coal Sales Agreement. Increased costs, alone, do not excuse performance

Section 2-712 of the UCC provides that when a seller wrongfully refuses to

deliver "the buyer may cover by making in good faith and without unreasonable delay

any reasonable purchase of or contract to purchase goods in substitution for those

due from the seller." W. Va. Code § 46-2-712(1). 'Yhen the buyer covers, the measure

of damages is the difference between the cost of the cover and the con tract price. W.

Va. Code § 46-2-712(2).

As of December 31, 2010, the defendants' total delivery shortfall was 5,999,628

tons. (Plfs' Ex. 606). This is the quantity of coal that Allegheny Energy was required

to purchase to replace the coal that the defendants failed to deliver. In order to fill the

void created by the defendants' breach, Allegheny Energy used the same practices that

it normally uses for the purchase of coal. (TT, p. 229).

Allegheny Energy does not normally purchase coal to cover specific breaches of

its contracts. (TT, p. 231). Rather, it purchases coal to fill its needs and operate its

power stations. (TT, p. 225). Here, the annual tonnage commitments in the Coal

Sales Agreement are a significant portion of the projected annual coal requirements for

the Harrison Station. Thus, defendants' failure to deliver the contracted coal created a

large hole in Allegheny Energy's coal portfolio. In addition to that hole, there was a

need to purchase additional coal for the Harrison Station due to normal operations of

the station, as well as less sizeable breaches by other suppliers. (TT, p. 232). Thus, to

calculate the price that Allegheny Energy paid to cover the defendants' breach, the

first step was to identify potential replacement purchases. The contracts considered

as potential replacement purchases were contracts for coal to be delivered to the

Harrison Station that were entered into after August 25, 2006 and contracts for the

39

delivery of coal to other stations that had tonnage diverted to the Harrison Station

after August 25, 2006. ('IT, pp. 764-65).10

Once the potential replacement purchases were identified, a weighted average

price was calculated. ('IT, p. 766). The weighted average price was then compared to

the price established in the Coal Sales Agreement. ('IT, pp. 767-69). The price

established in the Coal Sales Agreement was then subtracted from the average

replacement coal price and the difference was Allegheny Energy's damages per million

BTUs.l1 The result of these calculations shows that as of December 31, 2010,

Allegheny Energy spent $84,163,895 to purchase coal to replace the coal that should

have been delivered by the defendants. 12 (Plfs' Ex. 326A).

The defendants have argued that Allegheny Energy failed to prove its

entitlement to cover damages, because it failed to identify specific contracts that it

entered into as cover and it otherwise failed to cover within a reasonable time. Neither

10 Certain contracts that met the criteria for inclusion as potential replacement coal were not included in the weighted average either because those contracts were identified specifically as cover for another supplier's breach or because the contracts were negotiated and approved before August 25,2006. ('IT, pp. 765-66).

11 The Coal Sales Agreement includes a base price per million BTUs. Thus, the price per million BTUs in the Coal Sales Agreement was compared to the price per million BTUs for replacement coal. ('IT, pp. 766-68).

12 Although the defendants have raised issues about this weighted average, they received the benefit of lower priced coal in the process. When purchasing coal, Allegheny Energy first buys the lowest price coal available. Once the lowest price coal is exhausted, Allegheny Energy buys more expensive coal. Allegheny Energy could have treated the last purchased and highest priced coal as cover coal because the lower priced coal would have been purchased for other reasons. Thus, the defendants received the benefit of a conservative damages methodology. ('IT, pp. 2701-02).

40

of these arguments, however, is supported by the applicable law or the facts of this

case.

First, there is nothing in either the UCC or the cases interpreting it that

requires Allegheny Energy to identify specifically those contracts it entered into as

cover for the defendants' breaches. Rather, all that is required is that Allegheny

Energy act reasonably. W. Va. Code § 46-2-712.

Moreover, Allegheny Energy's calculation of its damages is supported by

decisional authority arising under similar factual circumstances. For example, in

Allegheny Energy in this case, made several purchases to cover the defendant's breach

and the jury averaged those purchases to calculate its cover costs. Id. at 1065. The

court held:

Bigelow's spot market purchases were made to replace several vendors' shipments. Bigelow did not specifically allocate the spot market replacements to individual vendors' accounts, however, nor was there a requirement that they do so. The jury's method of averaging such costs and assigning them to Gunny in proportion to the amount of jute it failed to deliver would, therefore, seem not only fair but well within the jury's permissible bounds.

In the case at bar, the [plaintiff] appellee did not go into the market and buy corn specifically to cover the contracts, but [plaintiff] appellee did continue buying corn from its members, as was its normal practice until the three contracts were fulfilled.

Id. at 468.

41

On those facts, the trial court found that the plaintiff had reasonably covered the

defendants' breach. Id. at 468. In affirming the trial court's decision, the court found

particularly applicable a comment to § 2-712, which states in part:

2. The definition of "cover" under subsection (1) envisages a series of contracts or sales, as well as a single contract or sale; * * * and contracts on credit or delivery terms differing from the contract in breach, but again reasonable under the circumstances. The test of proper cover is whether at the time and place the buyer acted in good faith and in a reasonable manner, and it is immaterial that hindsight may later prove that the method of cover used was not the cheapest or most effective.

methodology for the calculation of damages is entirely consistent with that

42

contemplated by § 2-712 of the UCC. Because the defendants breached the Coal Sales Agreement each time they failed to deliver the annual quantities required by § 1.2 of the Agreement, the plaintiffs' periodic purchases of cover coal were clearly done without unreasonable delay, as required by § 2-712.

To suggest, as the defendants do, that the plaintiffs should have committed in 2006 to purchase coal for breaches of installment deliveries due in 2007, 2008, 2009 and 2010, when those "breaches" had not yet occurred, is inconsistent with the plaintiffs' clear responsibilities under § 2-712. Simply put, the UCC does not require non-breaching parties to installment sales contracts to have crystal balls.

Second, even if the plaintiffs were required by § 2-712 to purchase cover for breaches that had not yet occurred, for the defendants' "replacement contract" argument to succeed, they would have had to prove that such contracts were available and that it would have been reasonable for the Allegheny Energy to enter into them. See Glenn Distributors Corp. v. Carlisle Plastics, Inc., 297 F.3d 294, 303-04 (3d Cir. 2002). They have failed to do so and, in fact, the only evidence of record establishes that such contracts were not available in late 2006.

Specifically, defense expert Lloyd Kelly testified that Allegheny Energy should have entered into a short-term contract with an option to extend the contract for a longer term. (TT, p. 2141). Mr. Kelly admitted that he did not know if that type of contract was available in late 2006. (TT, pp. 2183-85). Michael Delmar, who, unlike Mr. Kelly, was actually buying coal in late 2006, testified that the type of contract suggested by Mr. Kelly was not available in late 2006. (TT, p. 2697).

Another of the defendants' experts, Kevin Cardwell, testified that Allegheny Energy should have entered into a fifteen year fixed price contract for the delivery of 1.4 million tons per year. (TT, pp. 2449-51). Essentially, what Mr. Cardwell suggested

43

was that Allegheny Energy purchase 21 million tons to replace the 20 million tons the

defendants promised, without knowing how much coal the defendants would actually

deliver.Jv (IT, p. 2452). However, even if the contract suggested by Mr. Cardwell was

reasonable, Mr. Delmar testified that it was not available in late 2006. (IT, p. 2698).

The record contains no evidence to the contrary.

Finally, there is absolutely no evidence that Mr. Delmar acted unreasonably in

filling the void created by the defendants' delivery shortfalls. The defendants

introduced evidence in the form of testimony by their experts about what would have

been prudent. (IT, pp. 2137, 2357). Notably absent from that testimony was any

opinion that what Mr. Delmar did to cover the defendants' shortfall was unreasonable.

That is not surprising as Mr. Delmar was, by far, the most experienced coal

buyer who testified at trial. In fact, Mr. Delmar was the only person who testified who

was actually in the market buying coal at the time the defendants claim Allegheny

Energy should have purchased all the coal necessary to cover the defendants'

breaches. Mr. Delmar testified that he followed his usual practices in covering the

In January of 2008, Allegheny Energy notified the defendants that the shortfall

amount under Sycamore 1 agreement, to be delivered from the Sycamore 2 mine' at

13 The evidence introduced at trial clearly demonstrates that in late 2006, nobody knew how long the Sycamore 2 mine would be idled or how much coal the Sycamore 2 mine would produce once its operations re-started. (IT, pp. 229-30, 1040-41). Therefore, Allegheny Energy could not have known how much coal to purchase to replace the defendants' shortfalls or over what time period those purchases should be delivered.

44

Sycamore 1 prices, was 236,197 tons. (Plfs' Ex. 80). As a result of Allegheny Energy

being billed at the Sycamore 2 rates for this tonnage, Allegheny Energy has incurred

to seek damages for cover under § 2-712, as opposed to damages for non-delivery

14 Plaintiffs have applied a conservative approach to their calculation of pre-judgment interest by calculating interest for each year at year end rather than using the date on which each coal purchase was made during the year.

15 The per diem interest rate for § 1.2 damages is $13,835.16 and for § 1.3 damages is $366.45.

46

under § 2-713. Under § 2-712, damages recoverable are the difference between the cost of cover and the contract price. W. Va. Code § 46-2-712(2) ("The buyer may recover from the seller as damages the difference between the cost of cover and the contract price").

Allegheny Energy presented evidence at trial of the projected future coal prices on the open market, i.e. the cover price, as well as the prices of coal already purchased for delivery in the future. (Plfs' Ex. 706). Allegheny Energy also presented evidence of the price it would pay in the future for coal delivered under the Coal Sales Agreement. (Plfs' Exs. 278 and 279). The difference in the price of a ton of cover coal and the price of a ton of coal under the Coal Sales Agreement is Allegheny Energy's damages per ton. The damages per ton were then multiplied by the defendants' shortfall to arrive at Allegheny Energy's total future damages.

Because of the uncertainty relating to the defendants' future deliveries, Allegheny Energy calculated its future damages based on four different scenarios. Scenario 1 is based on a 20 million ton reserve and no future deliveries by the defendants. Under this scenario, Allegheny Energy's future damages are $342,000,000. (Plfs' Ex. 334-A; TT, pp. 786-87). Scenario 2 is based on a 20 million ton reserve and future deliveries of 500,000 tons per year. Under this scenario, Allegheny Energy's future damages are $247,000,000. (Plfs' Ex. 335-A; TT, p. 788). Scenario 3 is based on a 15.4 million ton reserve and no future deliveries by the defendants. Allegheny Energy's future damages under Scenario 3 are $210,000,000 (Plfs' Ex. 336-A; TT, pp 789-90). Finally, Scenario 4 is based on a 15.4 million ton reserve and future deliveries of 500,000 tons. Under Scenario 4, Allegheny Energy's future damages are $151,000,000. (PIfs' Ex. 337-A; TT, pp. 790-91).

47

In contrast, the defendants have argued that Allegheny Energy can only recover

its future damages if there has been a repudiation of the Coal Sales Agreement. 16 In

that circumstance, "the measure of damages for non-delivery or repudiation by the

seller is the difference between the market price at the time when the buyer learned of

the breach and the contract price, together with any incidental and consequential

damages provided in this division (§ 2-715), but less expenses saved in consequence of

the breach by the seller." W. Va. Code§ 46-2-713(a).

The defendants argue that the date Allegheny Energy learned of the breach was

in 2006 and, therefore, the market price for 2006 should be used for the purposes of

at length above, the defendants failed to repudiate unequivocally their obligations

under the Coal Sales Agreement at that time. Additionally, even if their ambiguous

communications were an "unequivocal" repudiation, Allegheny Energy was not

required to treat that repudiation as an anticipatory breach of the defendants' future

obligations under the Coal Sales Agreement. Moreover, using 2006 as the date for

measurement of the market price ignores the damages that Allegheny Energy has

actually incurred since that time and would defeat the purpose of damages under the

UCC, which is to put the non-breaching party in as good a position as it would have

been but for the breach. See 13 Pa. C.S. § 1-106.

On the other hand, if this Court holds that an anticipatory repudiation is

needed for the recovery of the future damages that the plaintiffs have proven at trial,

16 In fact, the defendants rely on that same theory in an attempt to cut off Allegheny Energy's recovery of actual increased coal costs incurred prior to the time of trial. That argument has no merit as to the costs actually incurred because, among other things, there was no earlier anticipatory repudiation.

48

using the date of trial is the most supportable repudiation date under the UCC and

applicable decisional authority because it takes into consideration all of the relevant

facts and circumstances of this case, including: (1) the reasonableness of Allegheny

was $36.50. (Dfts' Ex. 260A, 260B, 260C). Thus, the difference between the market

price and the contract price is $16.50 per ton.

17 This price was reported by Argus Coal Daily (Plfs' Ex. 581), a recognized industry publication, and it is consistent with the forward daily prices of $54.00 per ton. (Plfs' Ex. 697). Judah Rose, Allegheny Energy's coal price forecasting expert, projected a price of $57 for a ton of coal in 2011. (Jd). Although it would be proper to use any of the three prices to calculate future damages, to provide the most conservative calculations, Allegheny Energy has used the lowest of the three prices calculate its future damages. Considering the volatility of the coal market, regardless of which of the prices is used, there is a possibility that any award of future damages will not compensate Allegheny Energy for actual purchases that it will have to make after trial.

49

..

The following tables summarize Allegheny Energy's future damages using the

when all the coal required to be delivered under the Coal Sales Agreement would have

been delivered if the defendants had met their delivery obligations.

C. Allegheny Energy Has Not Saved Any Expenses As a Result of the Defendants' Breach

The defendants have argued that Allegheny Energy's calculation of its damages

is flawed, because it fails to account for expenses that Allegheny Energy will allegedly

save as a result of the defendants' breach. In support of this argument, the

defendants have presented calculations prepared by one of their experts, Kevin

Cardwell, that purport to show that Allegheny Energy is saving millions of dollars as a

result of the defendants' breach. (Dfts' Exs. 260A, 260B, 260C, 260D). However,

those calculations have no application for several reasons: they are speculative at

best, they are also directly contrary to the terms of the Coal Sales Agreement and they

are premised on defendants' unfounded belief that plaintiffs have the obligation to

accept future coal deliveries if defendants are found to be in breach.

In each of his calculations, Mr. Cardwell assumes that the defendants have no

delivery obligation after a certain date and that the defendants will continue to deliver

coal. However, Mr. Hatfield testified that he could not say for sure that Allegheny

Energy would get any coal in the future. (TT, pp. 1052-55). Indeed, Mr. Hatfield could

not guarantee that the defendants would add a second mining section in 2013, despite

51

·e

the testimony of several defense witnesses that they plan to do so--conveniently decided right before trial. (TI, p. 1055).

In addition to being speculative, Mr. Cardwell's calculations are directly contrary to the terms of the Coal Sales Agreement. Mr. Cardwell incorrectly assumes that, depending on the scenario applied, after a certain year the defendants' delivery obligation is zero. (Dfts' Exs. 260A, 260B, 260C, 260D). This is contrary to the terms of the Coal Sales Agreement, which provides that as long as the Sycamore 2 mine is producing coal, the defendants have an obligation to deliver 1.8 million tons per year. (Plfs' Ex. 21). For each of these reasons, the defendants' argument that they have done Allegheny Energy a favor by breaching the Coal Sales Agreement should be rejected.

52

...

CONCLUSION

The evidence introduced at trial establishes, beyond any reasonable dispute,

that the defendants have breached the promises that they made in the Coal Sales

Agreement. The evidence further establishes that the defendants' failure to fulfill their

contractual obligations is not excused by either the force majeure provision of the Coal

Sales Agreement or the doctrine of commercial impracticability. Finally, the evidence

shows that Allegheny Energy has suffered substantial damages as a result of the

defendants' failure to fulfill their promises. Accordingly, this Court should enter

judgment in favor of Allegheny Energy and award Allegheny Energy the damages that

it has incurred as a result of the defendants' breaches, plus interest and costs of suit.

Attorneys For Plaintiffs Allegheny Energy Supply Company, LLC and Monongahela Power Company

53

CERTIFICATE OF SERVICE

The undersigned hereby certifies that true and correct copies of the foregoing

Post- Trial Brief were served this 3rd day of March, 2011, upon counsel of record for the

defendants by electronic and first class United States mail, postage prepaid, addressed